IRS Updates Adequate Disclosure GuidanceThe IRS has updated guidance on how to make an adequate disclosure on an income tax return for purposes of reducing or eliminating a substantial understatement penalty and/or an unreasonable position ...

President Trump on February 9 signed the Bipartisan Budget Act into law after a brief government shutdown occurred overnight. The legislation contains tax provisions in addition to a continuing resolution to fund the government and federal agencies through March 23. The House approved this new law in the early morning hours of February 9, by a 240-to-186 vote. The Senate approved the bipartisan measure a few hours earlier, by a 71-to-28 vote.

President Trump on February 9 signed the Bipartisan Budget Act into law after a brief government shutdown occurred overnight. The legislation contains tax provisions in addition to a continuing resolution to fund the government and federal agencies through March 23. The House approved this new law in the early morning hours of February 9, by a 240-to-186 vote. The Senate approved the bipartisan measure a few hours earlier, by a 71-to-28 vote.

Take away. The Bipartisan Budget Act contains a significant number of tax provisions, including disaster tax relief and the extension of over 30 expired tax breaks. The majority of the tax relief included in the legislation applies for the 2017 tax year only. The full impact of these retroactive changes on the current filing season remains to be fully assessed. The IRS issued a statement on February 9 statement, saying that it was beginning to determine next steps. “The IRS will provide additional information as quickly as possible for affected taxpayers and the tax community,“ the Service indicated.

Comment

While many economists and lawmakers argue retroactive tax extenders are unfavorable tax policy, others contend that these tax breaks were included in the Bipartisan Budget Act because they had been relied upon and expected for the 2017 tax year but were squeezed out of year-end consideration by the Tax Cut and Jobs Act. A House Ways and Means Committee spokesperson told Wolters Kluwer that "[j]ob creators and families expected these extenders—in a pre-tax reform world—would be taken care of in a similar fashion as Congress has done for years." Moving forward, however, the committee is planning hearings to determine how and if tax extenders fit in post-tax reform years, the spokesperson added.

Extenders

Highlight of some of the tax extender provisions with more widespread impact than others are as follows (and are extended through 2017 only unless noted):

Exclusion from gross income of discharge of qualified principal residence indebtedness;

Mortgage insurance premiums treated as qualified residence interest;

Above the line deduction for qualified tuition and related expenses;

Election to expense mine safety equipment;

Special expensing rules for certain productions;

Deduction allowable with respect to income attributable to domestic production activities in Puerto Rico;

Special rule relating to qualified timber gain;

Empowerment zone tax incentives;

Credit for nonbusiness energy property;

Credit for nonresidential energy property (extended through 2021 and modified);

The Bipartisan Budget Act also established disaster tax relief for individuals and businesses impacted by California wildfires. Such relief includes but is not limited to allowing certain access to retirement funds, temporarily suspending the limit on charitable contribution deductions, allowing deductions for personal casualty disaster losses and a tax credit for employee retention. The Act also includes changes to the Opportunity Zones rules for Puerto Rico, originally included in the "Tax Cuts and Jobs Act." Additionally, tax relief is extended for areas affected by hurricanes Harvey, Irma and Maria.

Additional tax provisions

A number of new tax provisions were included in the legislation, as well as modifications to existing tax provisions. These include modifications of the rules relating to whistleblower awards, user fees on installment agreements, and hardship distributions and withdrawals from deferred accounts. The Act also mandates the creation of a new version of Form 1040, similar to a Form 1040EZ, for seniors, for tax years beginning after February 9, 2018 (the 2019 tax year for calendar year taxpayers). An additional provision of note is the requirement that for the excise tax on investment income of private colleges and universities to apply, the 500 students must be "tuition-paying." This requirement was included in the original version of the Tax Cuts and Jobs Act, but was removed at the last minute to comply with budget reconciliation rules.

Comment

The Joint Committee on Taxation has estimated that extending the expired tax breaks will cost the federal government over $15 billion. The disaster relief will add $456 million to the deficit in addition to relief that has already been provided.

The Treasury Department has proposed repealing 298 regulations. According to the Treasury, the targeted rules are unnecessary, duplicative or obsolete. In addition, the Treasury proposed to amend another 79 regulations to reflect the repeal.

The Treasury Department has proposed repealing 298 regulations. According to the Treasury, the targeted rules are unnecessary, duplicative or obsolete. In addition, the Treasury proposed to amend another 79 regulations to reflect the repeal.

Take away. "We continue our work to ensure that our tax regulatory system promotes economic growth," Treasury Secretary Steven Mnuchin said in a statement. "These 298 regulations serve no useful purpose to taxpayers and we have proposed eliminating them. I look forward to continuing to build on our efforts to make the regulatory system more efficient and effective."

Background

The Treasury began reviewing IRS regulations in response to two Executive Order (EO) issued in 2017. The first EO directed each agency to establish a Regulatory Reform Task Force. In addition, each Regulatory Reform Task Force was directed to review existing regulations to determine which, among other things, were outdated, unnecessary or ineffective.

The second EO directed the Treasury to review all significant tax regulations issued on or after January 1, 2016. Accordingly, on June 22, 2017, the Treasury issued an interim report identifying eight regulations to be revised or withdrawn. On October 2, 2017, the Treasury issued a second report noting that the IRS Office of Chief Counsel had identified over 200 regulations for potential repeal.

Executive review

Treasury did not describe to what extent, if any, the Office of Information and Regulatory Affairs (OIRA) is reviewing tax regulations. Under Executive Order 12866 (Regulatory Planning and Review), a regulatory action is "significant" if it is likely to result in a rule that: (1) has an annual effect on the economy of $100 million or more or adversely affects the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or state, local, or tribal governments or communities; (2) creates a serious inconsistency or otherwise interferes with another agency’s actions taken or planned; (3) materially alters the budgetary impact of entitlements, grants, user fees, or loan programs or the rights and obligations of recipients thereof; or (4) raises novel legal or policy issues.

Comment

Two senior GOP senators recently asked if some tax regs continue to be exempt from OIRA review based on an agreement between the Treasury Department and OMB. Generally, the agreement, dating back to 1983, "exempts regulations issued by IRS from further analysis and review unless [the regulations] were legislative and major.”

Unnecessary, obsolete regulations

The regulations to be repealed fall into three categories: (1) Regulations interpreting Code provisions that have been repealed; (2) Regulations interpreting significantly revised Code provisions that do not reflect the revisions; and (3) Regulations that are no longer applicable.

Moreover, removal is unrelated to the substance of rules they contain. Therefore, there is no negative inference regarding the stated rules. The IRS proposes to remove these regulations from the CFR solely because they have no current or future applicability. In addition, the IRS’s repeal of these regulations is not intended to alter any nonregulatory guidance that cites to or relies upon them.

Further, the Treasury proposes to amend 79 existing regulations to remove cross-references to the 298 repealed regulations. According to the Treasury, these amendments will streamline and reduce the volume of regulations taxpayers need to review and increase clarity of the tax law. These regulations will be repealed as of the date the Treasury decision adopting these proposals is published in the Federal Register.

Treasury requested comments on the proposal. Written or electronic comments and requests for a public hearing must be received by May 14, 2018.

The Trump administration on February 12 released its much-anticipated fiscal year (FY) 2019 budget request, "Efficient, Effective, Accountable An American Budget." The administration’s proposal calls for IRS funding that focuses additional resources on enforcement and cybersecurity. Coming off passage of the Tax Cuts and Jobs Act, this year’s budget recommendations contain only a handful of additional tax proposals when compared to some prior-year budget requests.

The Trump administration on February 12 released its much-anticipated fiscal year (FY) 2019 budget request, "Efficient, Effective, Accountable An American Budget." The administration’s proposal calls for IRS funding that focuses additional resources on enforcement and cybersecurity. Coming off passage of the Tax Cuts and Jobs Act, this year’s budget recommendations contain only a handful of additional tax proposals when compared to some prior-year budget requests.

Take away. Presidential budget requests are not binding; rather, the requests offer a legislative proposal for congressional lawmakers to consider. A Treasury Department "Green Book" that traditional outlines an administration’s revenue proposals for the coming year is not expected this year in light of the Tax Cuts and Jobs Act’s recent passage. Some practitioners have expressed concern that not enough resources in the proposed budget would be allocated toward providing guidance to fully implement the new law.

IRS

The administration’s budget proposal breaks its IRS funding request into four parts. The administration proposes allocating $11.1 billion in base funding, $2.3 billion for key tax filing and compliance initiatives, and $110 million for IT modernization efforts. Additionally, funding is requested to expand and strengthen tax enforcement.

Comment

"These additional investments over the next 10 years are estimated to generate approximately $44 billion in additional revenue at a cost of $15 billion, yielding a net savings of $29 billion over 10 years," the proposal states.

Tax provisions

In addition to IRS funding, the administration’s 2019 budget requests certain tax changes. These changes, among others, would include provisions to provide more oversight of paid tax preparers, require valid Social Security numbers when claiming the earned income and child tax credits, allow the IRS more flexibility in correcting errors on tax returns that seek refunds, allow Medicare recipients with high-deductible plans to make tax-deductible contributions to health savings accounts, and, as part of the administration’s infrastructure plan, expand by $6 billion the use of tax-exempt private activity bonds.

The Treasury and IRS have released their second quarter update to the 2017-2018 Priority Guidance Plan. The updated 2017-2018 Priority Guidance Plan now reflects 29 additional projects, including 18 projects that have become near term priorities as a result of the Tax Cut and Jobs Act of 2017.

The Treasury and IRS have released their second quarter update to the 2017-2018 Priority Guidance Plan. The updated 2017-2018 Priority Guidance Plan now reflects 29 additional projects, including 18 projects that have become near term priorities as a result of the Tax Cut and Jobs Act of 2017.

Take away. As in the past but make more urgent by the Tax Cuts and Jobs Act, the IRS intends to update it cumulative 2017-2018 Priority Guidance Plan to consider comments received from taxpayers and tax practitioners relating to additional projects and to respond to developments arising during the plan year.

Code Sec. 45S business credits with respect to wages paid to qualifying employees during family and medical leave;

Application of the effective date provisions under Code Sec. 162(m) to the elimination of the exceptions for commissions and performance-based compensation from the definition of compensation subject to the deduction limit;

Fines and penalties under Code Sec. 162(f) and new Code Sec. 6050X;

Computational, definitional, and other matters under new Code Sec. 163(j) on the deduction of business interest;

Bonus depreciation under new Code Sec. 168(k);

Computational, definitional, and anti-avoidance matters under the new Code Sec. 199A passthrough deduction;

Adopting new small business accounting method changes under Code Sec. 263A, 448, 460 and 471;

Although IRS officials have said that its updated list is not exclusive, they have emphasized that the items on the list will be its first order of business, which it hopes to get through by July. Treasury Secretary Steven Mnuchin predicted in mid-January 12 that the IRS will hire more employees to implement the Tax Cuts and Jobs Act: "Our number one issue is implementing the new tax law," Mnuchin said.

New proposed regulations under the centralized partnership audit regime address how and when partnerships and their partners adjust tax attributes to take into account partnerships’ payment adjustments. They also provide, among other additions and clarifications to earlier proposed regs, rules to adjust basis and capital accounts if the partnership adjustment is a change to an item of gain, loss, amortization or depreciation.

New proposed regulations under the centralized partnership audit regime address how and when partnerships and their partners adjust tax attributes to take into account partnerships’ payment adjustments. They also provide, among other additions and clarifications to earlier proposed regs, rules to adjust basis and capital accounts if the partnership adjustment is a change to an item of gain, loss, amortization or depreciation.

Items the allocations of which can have substantial economic effect, but only if the items are allocated as these regulations prescribe; and

Allocations (including allocations of newly defined"notional items") that cannot have substantial economic effect but nevertheless will be deemed to accord with the partners’ interests in the partnership if allocated as these regulations require.

Background

The new centralized partnership audit regime, put into place under theBipartisan Budget Act of 2015 (BBA), generally must be applied to audits of partnership returns filed for the 2018 tax years and thereafter. Their implementation generally looks to assessment at the partnership level, leaving the partnership to collect from existing partners, but with certain exceptions. In proposed regs that were issued in June 2017 (NPRM REG-136118-15), the IRS acknowledged that more guidance was necessary. In November, the IRS issued proposed regs on how certain international rules operate within the framework of the new centralized partnership audit regime (NPRM REG-119337-17). In December, the IRS issued proposed regs on the operation of the"push-out"rules for partner/partnership liability in tiered structures (NPRM REG-120232-17).

Comment

The preamble to the new regulations admits to not addressing all tax attributes that conceptually should be adjusted following a"partnership adjustment.""Specified Tax Attributes"must be adjusted under these regulations for only some but not all purposes under the Centralized Partnership Audit Regime, Grace observes. Tax professionals continuously will have to figure out (i) what attributes must be adjusted? (ii) under which rules? and (iii) for which purposes? And, after applying the pertinent rules, tax professionals also will have to determine whether they’ve interpreted the rules"in a manner that reflects the economic arrangement of the parties and the principles of Subchapter K of the Code"(Prop. Reg. Section 301.6225-4(a)).

Imputed underpayments

When a positive partnership adjustment is taken into account in determining an imputed underpayment,Code Sec. 6225does not provide for any item of taxable income to be allocated to partners. Instead, calculations are made at the partnership level, with the partnership paying the liability in the form of an imputed underpayment arising in the year of the audit adjustment. If, however, there are no adjustments to outside basis that reflect partnership adjustments that caused the imputed underpayment, a partner could effectively be taxed twice on the same income—once indirectly on the payment of the imputed underpayment, and again on a disposition of the partnership interest or a distribution of cash by the partnership. To prevent effective double taxation or other distortions in these cases, the new proposed regs provide for adjustment to a partner’s basis in its interest, and certain other tax attributes that depend on basis.

No imputed underpayment

The new proposed regs provide that an allocation of an item arising from a partnership adjustment that does not result in an imputed underpayment will not be deemed to have substantial economic effect ( Prop. Reg. §1.704-1(b)(4)(xiii)). It will, nevertheless, be deemed to be in accordance with the partners’ interests in the partnership if it is allocated in the manner in which the item would have been allocated in the reviewed year under theCode Sec. 704regulations. taking into account theCode Sec. 704successor rules.

"Push-out" elections

Code Sec. 6226(b) describes how partnership adjustments are taken in account by the reviewed year partners if a partnership makes a "push-out" election under Code Sec. 6226(a). Under Code Sec. 6226(b)(1), each partner’s tax is increased by the aggregate of the adjustment amounts determined under Code Sec. 6226(b)(2).

The new proposed regs provide that the reviewed year partners or affected partners must take into account items of income, gain, loss, deduction or credit with respect to their share of the partnership adjustments as reflected on statements relating to pushed-out items in the reporting year ( Prop. Reg. §301.6226-4(b)). Partnerships adjust tax attributes affected by reason of a pushed-out item in the reviewed year.

Comment

The new regulations under Section 6225 require a partnership and its partners to adjust"specified tax attributes"while the new regulations under Section 6226 require any"tax attribute"to be adjusted. Grace points out that the Code requires this distinction.Code Sec. 6226(b)(3)requires that"any tax attribute"be appropriately adjusted when a partnership has elected to"push out"an imputed underpayment to its partners.

Code Sec. 704(b)

An allocation of a pushed-out item does not have substantial economic effect underCode Sec. 704, since the allocation relates to two different tax years (that is, while generally determined with respect to the reviewed year, notional items are taken into account in the adjustment year). Nevertheless, the proposed regs provide that the allocation of such an item will be deemed to be in accordance with the partners’ interests in the partnership if it is allocated in the adjustment year in the manner in which the item would have been allocated under the rules ofCode Sec. 704(b)in the reviewed year, followed by any subsequent tax years, concluding with the adjustment year ( Prop. Reg. §1.704-1(b)(4)(xiv)).

Comment

Under theCode Sec. 704(b)regulations,"substantial economic effect"requires both"economic effect"and"substantiality."Traditionally, substantiality has been tested less mechanically than economic effect. Under these proposed regulations, Grace warns, however, that the economic effect of an allocation can be substantial"only if"an item is allocated in a particular way. This approach departs from tradition, although it arguably mitigates these rules’ complexity.

Burdens of partnership underpayments

Under the new regulations, persons who were not partners in a reviewed year may be allocated some of a partnership’s payment to the IRS. If the "reviewed year partner" to whom the payment generally would be allocated is no longer around, then the payment instead must be allocated to that partner’s "successor."

Comment

This possibility, Grace notes, raises the question of how successors should be compensated economically and the technical question of how to do this under Code Sec. 704(b).

The IRS has issued guidance for certain specified foreign corporations owned by U.S. shareholders subject to theCode Sec. 965transition tax that are requesting a change in accounting period. The IRS will not approve a request to change the annual accounting period under either the existing automatic or general change of accounting period procedures if the change could result in the avoidance, reduction, or delay of the transition tax. This guidance applies to any request to change an annual accounting period that ends on December 31, 2017, regardless of when such request was filed.

The IRS has issued guidance for certain specified foreign corporations owned by U.S. shareholders subject to theCode Sec. 965transition tax that are requesting a change in accounting period. The IRS will not approve a request to change the annual accounting period under either the existing automatic or general change of accounting period procedures if the change could result in the avoidance, reduction, or delay of the transition tax. This guidance applies to any request to change an annual accounting period that ends on December 31, 2017, regardless of when such request was filed.

Comment

Before the newly issued guidance, a specified foreign corporation with a tax year ending on December 31, 2017, could have avoided the purposes ofCode Sec. 965by changing its tax year. If a calendar-year deferred foreign income corporation (DFIC) changed to tax year closing on November 30, effective for its tax year beginning January 1, 2017, the election could defer by as much as 11 months a U.S. shareholder’s inclusion with respect to the DFIC. The election could also reduce the amount of the tax liability of a U.S. shareholder of the DFIC through the reduction of the post-1986 earnings and profits of the DFIC. Rev. Proc. 2002-39andRev. Proc. 2006-45are modified.

The IRS has posted best practices for return preparers addressing theAffordable Care Act’sindividual shared responsibility requirement, also known as the individual mandate. The Service reminded preparers that theTax Cuts and Jobs Actdid not eliminate the individual shared responsibility requirement for 2017.

The IRS has posted best practices for return preparers addressing theAffordable Care Act’sindividual shared responsibility requirement, also known as the individual mandate. The Service reminded preparers that theTax Cuts and Jobs Actdid not eliminate the individual shared responsibility requirement for 2017.

Take away.The IRS has cautioned that it will not consider a 2017 return complete and accurate if the taxpayer does not report coverage, claim an exemption or report a shared responsibility payment. In past years, the IRS processed these so-called"silent returns."

Individual mandate

Individuals without minimum essential health coverage must make a shared responsibility payment, unless exempt. Individuals with employer-provided health insurance, Medicaid and Medicare, and certain other health insurance coverage, generally are treated as having minimum essential coverage.

Some exemptions may be obtained from the ACA Marketplace. Other exemptions may be claimed on a taxpayer’s return. These exemptions include individuals who are members of federally-recognized Native American Nations; individuals who are incarcerated, individuals with a short gap in coverage; certain hardships; and more.

Individuals make a shared responsibility payment when they file their return. The payment is a flat dollar amount or a percentage of income, whichever is greater.

Best practices

A client can show he or she had minimum essential coverage by a number of methods, the IRS explained. The ACA requires certain large employers to inform employees about their health coverage. Clients with coverage through the ACA Marketplace also receive notification. Individuals with government-provided coverage, such as Medicaid and Medicare, should have supporting documents.

A client may not have proof of coverage, the IRS noted. In this case, the preparer"should discuss the nature of the coverage including the months they were covered to get a reasonable assurance so the preparer can accurately complete the tax return,"the IRS explained.

Going forward

TheTax Cuts and Jobs Acteffectively repealed the individual shared responsibility requirement by making any payment due $0. However, this change takes effect for months beginning after December 31, 2018. The individual shared responsibility requirement remains unchanged for 2017 and 2018.